Management Rights Letter (Updated July 2020) (NVCA)

This sample document is the work product of a national coalition of attorneys who specialize in venture capital financings, working under the auspices of the NVCA.  This document is intended to serve as a starting point only, and should be tailored to meet your specific requirements.  This document should not be construed as legal advice for any particular facts or circumstances.  Note that this sample document presents an array of (often mutually exclusive) options with respect to particular deal provisions.

MANAGEMENT RIGHTS LETTER

Preliminary Notes

The assets of a pension plan subject to the Employee Retirement Security Act of 1974 (“ERISA”) must be held in trust.  Moreover, the persons responsible for managing those assets have significant fiduciary duties under ERISA and cannot engage in certain transactions prohibited by ERISA.  If a pension plan covered by ERISA (an “ERISA Plan”) invests in a venture fund, then all of the fund’s assets - such as its investments in portfolio companies - are treated as assets of the ERISA Plan, absent an exemption.  As a result, the trust requirement applies, the managing partner of the fund is treated as an ERISA fiduciary, and the fund must comply with the rules regarding prohibited transactions.

The U.S. Department of Labor, which is charged with administering ERISA, has issued regulations that contain certain exemptions from the plan assets rules.  Under one (1) exemption, a venture fund is not deemed to hold ERISA plan assets if it qualifies as a venture capital operating company (a “VCOC”).  To qualify as a VCOC, the fund must have at least fifty percent (50%) of its assets invested in venture capital investments.  An investment in a portfolio company qualifies as a “venture capital investment” if the fund obtains certain management rights with respect to the portfolio company.  “Management rights,” in turn, are defined as contractual rights running directly from the portfolio company to the fund that give the fund the right to participate substantially in, or substantially influence the conduct of, the management of the portfolio company.  In addition to obtaining management rights, the fund is also required to actually exercise its management rights with respect to one (1) or more of its portfolio companies every year.

In order to build a case for an exemption from the ERISA Plan asset rules, a venture fund will generally ask each of its portfolio companies to sign a management rights letter in connection with the fund’s initial investment.  An example of such a letter follows.

[PORTFOLIO COMPANY LETTERHEAD]

[______], 20[__]

[Investor Name]

[Street Address]

[City], [State] [Zip]

            Re:      Management Rights

Ladies and Gentlemen:

This letter will confirm our agreement that pursuant to and effective as of your purchase of [________] shares of Series [_] Preferred Stock of [_____________________] (the “Company”),  [Investor Name] (the “Investor”) shall be entitled to the following contractual management rights, in addition to any rights to non-public financial information, inspection rights, and other rights specifically provided to all investors in the current financing:

This is a preview. The full template is free on GitLaw.